MedImmune had licensed a patent and a pending patent from Genentech related to the production of novel antibodies. The license required that MedImmune pay royalties to Genentech on valid, issued patents in exchange for permission to use those patents. Upon issuance of the patent for the application that had been pending, Genentech demanded royalty payments for the recently issued patent. MedImmune paid the royalties but said it was doing so under protest because it asserted that the patent was invalid and that its products did not infringe the new patent. MedImmune then filed an action under the Declaratory Judgment Act, asking the courts for "declaratory judgment," i.e., a ruling on the validity of the patent and whether it had been infringed.THE RULING
The lower courts dismissed the case for lack of jurisdiction, so the case was appealed and made its way to the Supreme Court. The Supreme Court held that MedImmune was legally entitled to file for declaratory judgment even while continuing to pay royalties.
The Declaratory Judgment Act allows a party to petition the federal courts for a judgment about whether its rights have been violated. But such a declaratory judgment action can only be filed and ruled on by the court if there is a "case or controversy" between the parties.2 Until recently, this meant that to file a declaratory judgment action regarding patent validity or infringement, a party needed to have a "reasonable apprehension of suit" by the patent holder—i.e., a reasonable fear that the patent holder might sue for infringement. Under this definition, since a licensee cannot be sued for patent infringement unless it breaches the terms of the license, a licensee would only have a "case or controversy"—and thus, the right to seek a declaratory judgment about a patent's validity—if the licensee first terminated or breached the license, such as by refusing to pay royalties. By terminating or breaching the license, however, a company would open itself up to a lawsuit for infringement or breach of contract by the patent holder, thus leaving the licensee at considerable risk.
In the MedImmune decision, the Supreme Court made an analogy to principles followed in cases against government action. In those cases, the courts do not require a plaintiff to transgress a law before challenging the constitutionality of the law in court, and a plaintiff's compliance with the law under protest does not eliminate the plaintiff's right to seek a declaratory judgment. Applying these principles to patent actions, the Supreme Court held that a patent holder does not have to infringe a patent before challenging the validity of the patent. The court did this by redefining "case or controversy," saying that a "case or controversy" exists when: (1) payment is demanded, such as pursuant to a license agreement or for infringement of a valid patent; and (2) the payment is made; but (3) the payment is involuntary or coerced. The Supreme Court found that the threat to MedImmune of treble damages and the loss of 80% of its business—which were the possible results of a patent infringement suit by Genentech—were coercive enough to preserve MedImmune's right to file a declaratory judgment action.
Genentech argued that MedImmune's suit was barred by the common law rule that a party to a contract cannot challenge the validity of the contract while continuing to reap its benefits. The Supreme Court noted that MedImmune was not repudiating the contract but was asserting that the proper interpretation of the contract did not prevent it from challenging the patents. Furthermore, the Supreme Court said that if the terms of the license agreement precluded the suit, Genentech would win its case on the merits rather than by obtaining a ruling that MedImmune did not have the right to file the suit in the first place.